Benjamin Graham is often referred to as ‘the father of value investing’, and wrote the book The Intelligent Investor, in 1949. Its basic principles are still in use today. Warren Buffett, Benjamin Graham’s protégé, is often called the world’s most successful investor, and abides by the ideals laid out in Graham’s works.



A main concepts touted by Graham is that of the passive investor and the active investor. The passive investor, often referred to as a defensive investor, invests cautiously, looks for value stocks, and buys for the long term. The active investor, on the other hand, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market.

There were two additional theories he gave investors. First, if an investment does not offer both some safety of principal and a promise of a decent return, which is to be discovered through analysis of the stock, the purchase is not an investment; it is speculation. His second rule was that the investor should make decisions independently of what the ‘market’ thinks. The reasons to choose a stock should be based on nothing more than sound research and analysis.

Because Graham understood that the great majority of individuals have other things to do besides research investments, he said most people fall into the passive category. He posited that the goal of the passive investor is to gain returns on a diversified portfolio that are on par with, or slightly above the average market returns for a given period.

He also set forth several rules for these investors. Large companies are best suited for these investors, and should meet the following criteria:

·A strong financial condition

·Stable earnings

·A history of strong dividends

·A growth rate of 3% or better

·Both P/E and book-to-value ratios should be moderate

Under these rules today, many blue chip stocks would fit into a defensive, or passive investor’s portfolio. However, for the active investor, there are additional items. The active investor is one who is both willing and able to devote the necessary time to uncover bargains in the market, in terms of value of the company versus market price, through thorough research and analysis.

For these investors, he recommended searching for secondary companies, which are solid firms in an important field, but not necessarily the leader in the field. Also fitting this definition are those companies that are industry leaders in less important industries.

Other areas of searching are for bargain stocks- those that are valued at less than half of the indicated value. He suggested several screeners, among them, stocks that fall into the lowest 10% of P/E ratios. He also recommended a portfolio of at least 10-30 stocks for proper diversification.

Benjamin Graham felt for both passive and active investors, with proper care in selecting investments, that money could be made in the market through sound business judgment and analysis.

http://www.Value-Investing-Center.com